SBA 504 Loan Overview

SBA 504 Program Overview Georgia Small Business Capital

504 Program Features & Benefits to Banks Loan Processing, Closing & Servicing General understanding of the SBA 504 loan program from origination to servicing. Goal

Benefits to Banks 1 st lien position with low loan-to-value –- reduces collateral risk CDC staff manages all SBA forms, packages, closes & services the SBA loan Provide customers opportunity to obtain 504 loan building stronger banking relationships 50% funding allows banks with in-house lending limits to preserve available funds for borrower’s working capital/growth Helps with CRA credit requirements You set your own rate and fees

Benefits to Borrower Up to 90% financing for project Long-term, fixed rate funds … enhancing cash flow for business 10 or 20 year term … avoids balloon payments or loan extension Lower down payment conserves working capital

How 504 Works for You - Mitigation of credit risk Liquidity management Managing overall lending limits Strengthening core earnings through a highly marketable commercial lending product Serving your customer’s needs in the community

Use of Funds Fixed-Asset Acquisition or Expansion Including: Purchase land & construction of new buildings Purchase and/or renovate existing buildings Acquire/Install machinery Construct or remodel buildings on leased land Soft costs involved in above projects

Maximum Amount of Loan Up to $4,000,0000 Maximum 40% of project costs ($2,000,000 if within SBA Public Policy Goals) Minimum Amount of Loan $50,000 There is no maximum limit to project size. Project Size Requirements

Job Requirements Provide one job for every $65,000 funded Exception: Projects that meet SBA Public Policy Goals

Public Policy Goals Rural Development Expansion of Minority, Women or Veteran-Owned Business Development Expansion of Exports Business District Revitalization Enhanced Economic Competition Restructuring Due to Federally Mandated Standards and/or Policies Changes Necessitated by Federal Budget Cutbacks Opportunity to fund up to $4 Million and Not Required to Create one job for each $65,000

Not Eligible for 504 Funding Non Profits Lending institutions Life Insurance companies Private clubs Speculative investment Non-owner occupied building Gambling concerns Businesses engaged in promoting religion Cooperatives Political or lobbying services Businesses located in foreign country or owned by an alien Businesses selling through pyramid plans

Typical Structure for Established Business Loan Bank - 50% SBA 504 Loan - 40% Owner’s Equity – 10%

Typical Structure for a Special Purpose Building OR Start-up Bank 50% SBA 504 Loan 35% Owner’s Equity 15%

Typical Structure for Start-Up Business AND Special Purpose Building Bank 50% SBA 504 30% Owner’s Equity 20%

Financing on Typical $1 Million Project Loan % of Entity Amount Project Security Lender $500,000 50% 1 st Mortgage CDC/SBA $400,000 + 40% 2 nd Mortgage fees Borrower $100,000 10% TOTAL: $1,000,000 100%

Eligible Project Costs: Land $ 125,000 Construction 625,000 Contingency 29,000 Permits 2,000 Site Preparation 5,000 Architect/Engineering 25,000 Machinery/Equipment 144,000 Appraisal 4,000 Environmental Report 2,000 Interim Loan Fee 9,000 Interim Interest 30,000 (Construction period + 3 months) TOTAL $1,000,000 50% Bank $500,000 40% CDC $400,000 10% Owner $100,000 100% $1,000,000 Any costs incurred within 9 months prior to submission to SBA are eligible toward total project costs

Ineligible Costs: Debt Refinancing Third Party Loan Fees Ancillary Business Expenses- Working capital Counseling or management services fees Incorporation/organization costs Franchise fees or Advertising Fixed Asset Project Components - Short term equipment Auto/trucks Construction equipment

Occupancy Requirements Existing Building: Business must occupy at least 51% - may lease out the other 49% Newly Constructed Building: Business must occupy at least 60% - must occupy up to 80% within 10 years

Ownership of Building By the Operating Company (OC) By an Eligible Passive Company (EPC) Individuals New corporation Partnership Limited liability corporation Trust Ownership need not be identical

Size Standards Business – when combined with affiliates must: Have less than $7,500,000 tangible net worth Have less than $2,500,000 in net income (average for last 2 years) There is no limitation on annual sales volume

Availability of Personal Resources Any business owner of 20% or more can retain personal liquid assets (cash or securities) according to a tiered schedule. Requirements are the same as in the 7(a) program.

Appraisal Requirements When more than $250,000 of loan proceeds are used for real estate transactions For loans over $1,000,000 New construction

Environmental Requirements Questionnaire Only – Bare land no history of agricultural use When Phase I completed within 1 year Project involves multi-unit condominium TSA or Phase I required- When questionnaire indicates risk of environmental contamination

Comparison Conventional vs 504 Loan Assumptions: Total project costs = $1,000,000 $ 100,000 Owner contribution (10%) $ 900,000 Total financing required (90%) 7.00% Interest Rate on Conventional Loan 25 Amortization on conventional/bank portion 5.50% Rate of interest on SBA loan 20 Amortization on SBA portion

Comparison Conventional vs 504 Loan Conventional Financing Scenario - Loan Amount Rate Amortization Interest Paid $900,000 7.00% 25 year $2,390,000 SBA/CDC 504 Financing Scenario - Loan Amount Rate Amortization Interest Paid Bank $500,000 7.00% 25 year $1,328,000 CDC $406,000 5.50% 20 year $ 269,000 $1,597,000

Comparison Conventional vs 504 Loan Conventional – Total Interest $2,390,000 SBA 504 – Total Interest $1,597,000 Interest Savings to Business with 504 = $793,000

Prepayment Prepayment penalty applies Depending on interest rate, it may be beneficial to prepay the bank loan first Two prepayment windows are available to minimize interest expense First Half of 20 year Debenture

Fees Charged by CDC Financed as part of 504 loan – 2.15% of net debenture CDC Processing Fee: 1.50% Underwriting Fee: 0.40% Covers expense of pooling & underwriting 504 debenture – paid directly to Merrill Lynch Funding Fee: 0.25% Paid to Development Company Funding Corporation Total: 2.15%

Legal Fees Closing costs can be financed into the gross debenture & paid to CDC’s closing attorney Legal costs incurred that are not financed – Title insurance Recording fees UCC searches

Bank Fees Bank Participation Fee – paid by GSBC 0.5% charge to Bank by SBA on the Bank’s permanent loan amount Not included in SBA financing structure

Debenture Rate Based on current market conditions at the time the debenture is sold Paid to bond investors on semi-annual basis Negotiated by DCFC, Underwriters & U.S. Government

Effective Rate Rate the borrower actually pays Note rate TBD% Annual Central Servicing Agent Fee 0.10% CDC Servicing Fee 0.625% Loan Loss Reserve Fee 0.021% Effective Rate XX%

Interim Loan Used to facilitate change of ownership within timeframe specified in the contract Used to finance construction and/or improvements to property – if applicable

Bank’s Permanent Loan Permanent financing must be for at least 10 years – (on a 20-year debenture) with no balloon payments during that time Re-pricing is allowed – usually every 5 years It’s possible to start amortizing the bank’s loan before the 504 loan is in place

Funding the 504 Loan When SBA Authorization is received – CDC reviews for changes and/or errors Copies sent to Borrower & Bank with instructions Bank orders Appraisal & Environmental review (if not already completed) CDC orders Preliminary Title & UCC searches (if needed) Work begins on obtaining required documents – corporate resolutions, certificates of good standing, etc.)

Funding Process CDC schedules “Authorization Meeting” with Bank and Borrower to: Review terms & conditions Set action steps & time line Review for errors Collect balance of borrower’s fee Sign authorization & collect any other documents

Next Step in Funding Process Before a debenture sale date is set: Title must be taken by new owner Interim loan must be fully disbursed Construction or remodeling must be complete Permanent Certificate of Occupancy or Certificate of Completion must be forwarded to CDC Borrower’s financial statements must be current within approx. 120 days of targeted funding date

Next Step in Funding Process Once Debenture is Sold – Funds are wired to Bank to pay down interim loan Letter sent to Borrower stating effective loan rate, payment amount & due date of first payment One week later, final closing letter sent to Borrower with Amortization Schedule & Debenture Note

Important Notes: It can take up to 3 months to fund the 504 Debenture once project completed Any changes to the Authorization require SBA approval Borrower is prohibited from converting part of the interim loan to Bank’s term loan prior to funding the 504 loan Bank should set the maturity date on interim loan to coincide with estimated 504 funding date not project completion date

Events that can Delay Funding Process: Changes in project costs Lower than expected appraisals Incomplete or negative environmental investigations Changes in Borrower’s organizational structure Adverse financial change in the operating company Lawsuit, divorce or other legal issues

Delay in receiving Subordination Agreements or UCC filings Unexpected Deeds of Trust or Liens on collateral Delays in obtaining a final title policy to property taken as collateral Delays in completing documentation within time allotted Property or owner insurance issues Delays to Funding Cont:

Example of Estimated Timeline Day 1… Project is complete. Title is transferred to Borrower. All outstanding documents have been submitted to CDC. Day 15… File sent to CDC’s legal department for creation of legal documentation. UCC requests sent to Borrower for signatures (if applicable). Legal documentation sent to Borrower & Banker for review & signatures. UCC filings returned by Borrower & sent into State for filing.

Day 60… Legal documentation returned & recorded. Final closing package forwarded to SBA for review. SBA Field office reviews package & forwards to the Central Servicing Agent for next Debenture sale. Day 90… Debenture sale. Interim loan paid down & closing letter sent to Borrower. Day 135… Refund sent to Borrower & file forwarded to CDC servicing department. Estimated Timeline Cont.

Responsibilities of Borrower & Banker Inform CDC Loan Officer of any changes Inform CDC Loan Officer when project complete Submit all requested documentation Provide proof of equity contribution by Borrower

Responsibilities of the Banker Provide title insurance information to CDC Closing Department as soon as possible Provide an appraisal to the CDC Provide appropriate environmental investigation to the CDC Provide letter stating interim loan is fully disbursed

Responsibilities of CDC Loan Officer Continuous contact to track project progress Resolve project cost increases/decreases or other changes Answer questions & provide information

CDC Servicing Responsibilities Loan servicing responsibilities include, but are not limited to: Monitor, track & review borrower’s financial statements, insurance coverage of collateral, physical condition of asset, payment of taxes & UCC continuations Monitor loan repayment, collection & prepayment requests Evaluate requests for change relative to original terms & conditions of the SBA 504 loan (i.e. collateral changes, ownership changes & assumptions) Work-out situations, problem loans & liquidation

Feasibility Assessment for 504 Purchase & sale agreement or terms of sale Cost breakdown of project 2 years of company tax returns and/or financial statements Detailed schedule of long-term debt Eligibility Personal financial statement & 1 year of personal tax returns

504 Advantages to Pass on to your Clients A low down payment to improve your client’s cash flow – They conserve valuable working capital and You have a stronger borrower A fixed-rate 504 loan to minimize the risk of future rate uncertainty A longer term to bring debt service in line with cash flow generated by a long-term asset

For Your Next Small Business Borrower Planning an Expansion . . . Consider an SBA 504 Loan Contact GSBC to Make it Happen !

SBA 504 Loan Overview

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